When determining equilibrium, we take consumption equal to C= ¢ + c' y where ¢ is the autonomous consumption or minimum consumption that would take place even in absence of income. What could be the consequences on equilibrium income if the autonomous consumption ¢ was negative?
$\begingroup$
$\endgroup$
$\begingroup$
$\endgroup$
I cannot see any way to have negative autonomous consumption. I believe autonomous consumption's extreme is zero if there's a kind of superheroes who don't need water, electricity and food to live and they save everything they earn. But in a case like this, there's no reason for having aggregate supply at all as nobody will buy the goods in first place.
answered Jan 28 '17 at 8:48
-
$\begingroup$ Yes, you are right. It doesn't seem like a plausible case in reality but like a few hypothetical cases if we consider hypothetically, autonomous consumption was ever negative how could it impact the equilibrium? $\endgroup$ – SDM Jan 28 '17 at 12:24
-
$\begingroup$ Also, when we talk about autonomous consumption we are assuming that the consumer s are borrowing to carry on their consumption and since it's a static model, can we assume that the consumers are lending at that particular time and thus, autonomous consumption is negative? $\endgroup$ – SDM Jan 28 '17 at 12:34
-
$\begingroup$ I suppose we talk about Aggregate Demand/Supply Equilibrium. In this case, $AD=C+I+G+NX$. If the economy is closed we just remove $NX$ from the formula. The autonomous consumption is just the constant term of $C$. If the constant decreases, then $AD$ shifts to the left (just look it mathematically since everything is linear). $\endgroup$ – Commissar Vasili Karlovic Jan 29 '17 at 0:26
-
$\begingroup$ If your economy is closed, the aggregate borrowing cannot exceed savings in first place. However, if your economy is open and you borrow to consume, then $MPC$ and/or $Y_d$ will increase, not autonomous consumption. Check en.wikipedia.org/wiki/Autonomous_consumption $\endgroup$ – Commissar Vasili Karlovic Jan 29 '17 at 0:36
